The Week India – July 21, 2019

62 THE WEEK • JULY 21, 2019

BUSINESS

AUDIT

Corporate

managements, in

pursuit of short-

term gains, may use

pressure effectively

to make a corporate

misdeed stay

undetected.

— Suresh Senapati, former

chief financial officer and exec-

utive director of Wipro Ltd

firms may include not reporting

correct profit, not disclosing im-

pairment issues or defaults and not

reporting internal controls. Though

several steps have been initiated by

the regulators against the big audit

firms, the larger consensus has been

that banning them is not the right

solution. “Banning is a punishment

not only for the guilty but also for

the service receiver,” said Shankar

Jaganathan, founder and chief

executive of CimplyFive Corporate

Secretarial Services. “Instead, heavy

monetary penalty could be levied on

them to act as a deterrent and the

individuals guilty of gross negligence

or misconduct can be banned.”

A spokesperson for BSR & Associ-

ates—a KPMG affiliate which was the

statutory auditor of IL&FS Financial

Services and is defending itself in the

National Company Law Tribunal over

the petitions filed by the ministry

of corporate affairs—said banning

of audit firms was not an accepted

practice. “Globally, even if audit firms

are held guilty after due process of

law, regulators either seek to impose

financial penalties or require the

firms to take appropriate remedial

measures. The underlying philosophy

behind this approach is to ensure

that acts of individual teams do not

adversely impact others who are not

connected with the failed audit.”

Deloitte Haskins and Sells, which

also audited IL&FS companies,

strongly defended its case. “The firm

stands fully for its audit work which

has been conducted in full compli-

ance with the professional standards

in India, as well as all applicable laws

and regulations,” said a spokesper-

son. “We look forward to presenting

our position, which will be supported

by the facts and necessary context,

to the courts and other relevant

authorities. The firm has faith in the

regulatory and judicial processes and

will continue to cooperate fully with

the authorities.”

Banning big firms may create a

vacuum in the market. Though there

are scores of smaller Indian firms,

many of them do not have the exper-

tise to conduct large-scale audits of

large corporates. However, given the

fast-changing regulatory environ-

ment, there is a growing demand for

specialisation in auditing. Smaller

firms that offer specialised auditing

are better equipped to compete with

larger firms.

Of late, audit firms have also

become vigilant and started avoiding

accounts that they feel are risky. Re-

cently, PwC resigned as the auditor of

Reliance Capital and Reliance Home

Finance because it felt that it was not

getting satisfactory answers. PwC had

also resigned as the auditor for Ever-

eady Industries and as the external

auditor of the construction company

Group Five.

“Due to the increasing scrutiny

by the regulators, audit firms have

become very careful and are letting

go of accounts that they feel are risky

and can lead to trouble later,” said

an auditor. “However, due to the

complexities of businesses, an audit

firm needs to do its own checks and

not just rely on the information that a

corporate is providing. This has made

the task very complex and an auditor

needs much more expertise and skill

than ever before.”

There is, however, a lot more that

needs to be done to clean up the

system. “Corporate India has not

changed a bit in the last 10 years

in terms of corporate governance,

shareholder activism or public disclo-

sures. We are still at ground zero on

the independence of independent di-

rectors or making the whistle blower

policies work,” said Nandu R. Kumar,

legal expert and CEO of Spice Route

Business. “The National Financial

Reporting Authority (NFRA) was sup-

posed to take initiatives to strength-

en the audit and public disclosure

framework in India. The NFRA is still

taking baby steps and the ecosystem

is yet to see its impact. The safeguard

mechanisms introduced by the

Companies Act, 2013, have become

ticking of checkbox exercise. At the

same time, competition is pushing

the audit firms and their partners to

deliver more.”

India is set to strengthen audit

reporting standards. The ministry

of corporate affairs is reportedly

planning to propose changes to the

Companies (Auditor’s Report) Order.

Also, the NFRA may take over many

of the audits that were overlooked

by the Institute of Chartered Ac-

countants of India. Similarly, SEBI's

new rule pertaining to reviewing the

accounts of unlisted subsidiaries of

listed entities is aimed at controlling

auditing frauds.